KUALA LUMPUR: Fitch Ratings has maintained Malaysia on a “negative” outlook to reflect the erosion of the current account surplus amid large public sector deficits and a drop in oil prices, in the context of relatively weak credit fundamentals for an “A” range sovereign.

In its 2015 Outlook for Emerging Asian Sovereigns report, the rating agency said the government has so far stuck to a path of consolidation for the headline federal deficit set out in July 2013, although the drop in oil prices could delay or derail fiscal consolidation, if sustained.

“The emergence of ‘twin’ public and external deficits could affect investor confidence, if it were to occur,” said Fitch.

On Jan 11, Fitch said market volatility in December 2014 could be a foretaste of what is to come in 2015 and that positive pressure on ratings was ebbing.

It said eight of 10 emerging Asian sovereigns are on “stable” outlook, with two (Malaysia and Mongolia) on “negative” outlook.

Fitch expects real gross domestic product (GDP) in emerging Asia excluding China to expand by about 6% in 2015 and 2016, remaining the world’s fastest-growing region.

“We forecast China’s GDP will expand at 6.8% in 2015 and 6.5% in 2016, as the government’s bid to rebalance the economy works through.

“Lower oil prices and faster growth in advanced economies support most emerging Asian countries, including China,” it said.

Local economists contacted by The Edge Financial Daily dismissed concerns of a twin deficit occurring in Malaysia.

MIDF Research chief economist Maslynnawati Ahmad does not expect further negative impact from Fitch’s negative outlook, saying it has been in place for some time.

“We should expect the public sector to adjust to the low oil prices by cutting back on some spending to ensure the deficit target is met. Going forward, we should also expect bond yields and interest rates to trend higher, particularly if we want to see the ringgit stabilising at a stronger level,” she said.

AllianceDBS Research chief economist Manokaran Mottain said the rapid decline of oil prices has eroded some of the positive effects of the fiscal deficit measures, but overall improvements are expected in coming quarters.

This article first appeared in The Edge Financial Daily, on January 13, 2015.